Saturday, February 13, 2010

The Spanish Economy

Spain's been receiving a fair amount of coverage in the international press lately because of its economic situation and the growing fears it may not be able to meet its financial obligations. Many international economists such as Paul Krugman feel one of the underlying problems is high wages which makes the cost of Spanish goods and services uncompetitive in the global market place. I dunno. Far be it for me to argue with a Noble prize winner, but when I think of Spanish salaries, "high" wouldn't be the first word to pop into mind. In fact, most people I know find each year a little bit more of a struggle than the one before and when they think back to the time of the peseta, watch their faces light up in shock as they calculate the cost of living now versus what it once was.

Much of the press about Spain's economy has focused on its inability to devalue its currency now that it's in the Euro zone and what "austerity" cuts need to instituted to bring down its deficit. What surprises me is that there seems to be little coverage about Spainish productivity because basic economics says increasing it can help offset the deflationary salary pressure. After all, the Germans and Japanese don't earn less than the Spanish.

So what's the cause of the Spanish worker producing less than a Maltese and slightly more than an Estonian and Greek, despite having a much larger economy? The coverage often brings up Spain's two tiered contract system and rigid labor market that seems to promote "nonperformance incentive pay" and it's tough to argue it's not in need of reform. The question of how to do this and not completely screw the worker is a complicated issue and one which I don't pretend to have the answer. But again, what surprises me isn't what's being discussed but the lack of discussion. In this case, the third tier of the economy - the autonomo or freelance - and one which I do have somewhat of an idea.

Why is this area of the economy important? Well, if you're contemplating moving here armed with a service to offer, whether it be web design, coaching or translation, it's how you'll probably earn a living. As I've mentioned before, the paper work is a pain in the ass and the system itself is inherently regressive, creating the moral hazard not to pay it. Basically, right now, the company deducts the 15% income tax off your invoice and pays it to the tax authorities while you're responsible for a flat amount monthly or quarterly for social security. An easy and doable fix to improve it would be to bracket the income tax percentage based on earnings and deduct a flat percent for the social security. Of course, this would shift the onus onto the employer to file both amounts with the authorities and probably reduce the number of directors who become high-paid consultants, which is probably why no one talks about it.

But, like I said, there's little discussion about this type of reform in any of the national or international coverage, nor is there much about ways to improve productivity, instead the focus has been on cutting wages and government spending - the last two things the economy needs when still mired in recession. Zapatero's recent suggestion to cure the Spanish economy's problems, meanwhile, was to extend the retirement age as if grandma doesn't have enough to do babysitting the kids while mommy and daddy work. The tragic farce of the accidental president continues and the only thing worse is the opposition. Of course, Spain is not alone when it comes to this political predicament of dumb and dumber.

A pretty dire place, right? Well, it ain't Silicon Valley of the nineties, that's for sure, but it's not Argentina from the same period either, although I wouldn't put all my money in the banks here. Still, Barcelona is Barcelona and if your work allows you to choose a location, it's not a bad place to call home. And if your job doesn't afford you that chance, a year long sabbatical from career goals and aspirations isn't always a bad thing if you can afford it or are willing to do jobs you thought you left behind in college. And on a more positive note, it hasn't only been doom and gloom about Spain in the international press. An American magazine recently ran a feature on a local Catalan chicken and shrimp dish.

7 comments:

Well, I am not sure I entirely agree with the two-tier employment contracts argument. I think that is a handy excuse to have for the employers’ lobby. As far as I can see, employment law is Spain is already flexible enough: my mum has to resign every summer to take holidays.

I see the pervasive presence of union reps as more of a problem than employment law. Or the lack of IT investment in many SMEs, or the red tape to set up a business, etc. Anyway, employment law is as "rigid" (whatever that means) as in Germany and that does not seem to impact productivity in the same way as in Spain so it must be something else.

According to the Spanish Government, it is all the fault of low-skilled foreigners brought in to work in the building industry. Page 9 of this link:http://estaticos.elmundo.es/documentos/2010/02/08/tesoro.pdfNo comment….

I have always been of the view that the best way to deal with Spain’s problem (apart from reducing unions’ influence in business life) is with a period of mild deflation or zero price-growth. After all, disposable incomes in Spain got a hammering with the introduction of the euro. That was coupled with high levels of indebtedness as house prices rose beyond reasonable levels.

Devaluation is not possible with the euro, and an internal devaluation is also a non-starter as this would make things worse: less income to pay high levels of debt. The easiest thing is for prices to go back to pre-euro trends and let people’s disposable incomes "catch up". Agreed this is easier said than done but anything else is bad news for the banks (massive losses in their mortgage books) or the government (lower taxes paid).

A race to the bottom in employment law will only bring more misery as salaries are kept lower making it impossible for people to pay off their mortgages, let alone kick-start domestic consumption. It takes two to tango: perhaps if employers invested more in technology and training, productivity would be higher.

Good to hear from you. Yeah, I agree investment in technology and training would be money well-spent and there's a need to cut red tape when it comes to start-ups. I'm disappointed there wasn't more money dedicated to that in the last stimulus, but not surprised.

You're prescription for the economy and the impact of the euro on disposable incomes seems spot on. The million dollar question is how to bring down prices, especially in housing.

I guess my point about the autonomo law is a tweak here offers more flexibility to hire, say on a seasonal or hourly basis. This would especially help companies in the service sector like restaurants or hotels. It wouldn't address some of the systematic problems you mentioned but it'd expand the part-time job market offering work for university students and put a dent in the youth unemployment, I think.

Thank you for this post (since I asked you for it!). I read and hear so much about the current economic crisis in Europe, particularly in Spain, Portugal, and Greece, and it's extremely interesting to get an insider's perspective. A recent news report here in Norway featured an interview with an American finance academic teaching in Madrid (if I recall correctly) who mentioned the rigid employment laws as a huge obstacle to repairing wage inequality and lowering youth unemployment levels. But, as Rab pointed out, Germany also has fairly protective employment laws and doesn't seem to suffer from them. All very interesting.

Seems to me that there are no good fixes - some what painful deflation is the only answer - govt should ensure austerity measures fall harder on people who can afford it.

Moving forward, bubbles in housing, banking or economy in general must be avoided (a challenge for smaller Euro countries)...seems to me that Germany and France are not suffering as much now precisely because they avoided rapid economic growth and property bubbles - compared to Club Med countries, Iceland, Ireland and to a slightly lesser degree UK.

The US suffered same property bubble is in the same boat with extremely flexible labor laws and high productivity. A textbook example of no shared sacrifice in weak recovery measures ....wealthiest 1% benefited tremendously in naughties and have full employment - zero shared sacrifice http://online.wsj.com/article/SB20001424052748704479704575061682782427418.html

- Ian

(UK/US Citizen living in Norway - good economy but food and weather fall far short of Spain).

@ Michele - Hope the post helped. Yeah, I read Krugman's post. It's such a complex subject. I think Spain's biggest problem is that it's not known for anything but sun and food. They're starting to do some things with renewable energy but it'll take a while. The shame of it is the recovery is mired in partisan politics, a lot like in the states. It almost seems Zapatero is waiting for some externally imposed reform for cover. Anyway, like I said, it could be worse.

@ Ian - Thanks for the compliments. It's funny, I was watching a documentary on debtors' prisons in London during the 1700's and a lot of people were shackled from bad investments in the bubble at the time. It seems the entire history of Anglo-American economics has been boom or bust.

I totally agree, the redistribution of wealth into the upper one percent is the fundamental cause of the current economic state.I read in LA there are 250,000 millionaires and 1.4 million people living in poverty.

One of the good things about living in Spain is I can live without credit cards and monthly payments so even though I earn less than the states, I'm richer at the end of the month.